Deposit Extortion: A Poorly Drafted Contract Leads to a Lawsuit

In our last installment of “Ask a Maritime Attorney,” we departed from our usual format and shared a legal “war story,” rather than answering a specific question. Our readers seemed to have some fun with that format, so we will try it again. The following discussion is offered as a case study.

The Facts In a vessel purchase transaction, a problem may arise if the buyer rejects the vessel for some reason and then looks for the return of his or her deposit. This case looks at a problem that arose when the vessel failed the survey, and the broker and seller refused to return the deposit to the buyer.

The transaction was scattered across a large part of North America. The boat was a 50-foot sailboat located in Florida, and it was listed with a Canadian yacht broker. The seller lived in Michigan and the buyer was a California resident.

The buyer submitted an offer of $500,000 and paid a $50,000 deposit to the broker. The offer was submitted on a one-page purchase offer form supplied by the broker. The buyer added language to the standard form to make the offer “subject to survey,” but the contract provided no instructions whatsoever regarding the handling of the deposit, or about the payment of attorneys fees or the venue for a lawsuit if a dispute arose. The parties and the broker were very friendly throughout the early phases of the transaction, so the buyer was not concerned about the technical language of the contract.

The buyer had the boat surveyed, and after reviewing the list of recommendations in the survey report he decided to reject the vessel. He contacted the broker to advise him, in writing, that he was rejecting the vessel and he requested the return of his deposit.

That’s when everything came apart.

The broker simply ignored the buyer. He never replied to the buyer’s e-mails or letters, and he refused to take his phone calls. The buyer was likewise unable to reach the seller. The buyer’s frustration grew for months, and he was forced to hire a lawyer to go after his $50,000 deposit.

The other parties also hired lawyers, and they started to communicate through their “hired guns.” The seller was unwilling to return the deposit because he felt the buyer’s surveyor was incompetent and that the problems noted in the survey report were grossly overstated. He also claimed that the buyer had caused him to lose other opportunities to sell the boat.

In light of these issues, he felt that the buyer had breached the purchase agreement and he was entitled to retain at least half of the buyer’s deposit. The buyer’s position was that he trusted his surveyor, and further, that the boat was not off the market for very long and there was no real evidence that the seller could have sold the boat to anyone else during the period.

Both parties realized that they could run up a fortune in attorneys’ fees, so they ultimately agreed to a compromise, allowing the seller to keep $5,000 and return $45,000 of the deposit to the buyer.

Unfortunately, this was not the end of the story.

Upon reaching an agreement with the buyer, the seller contacted the broker, to instruct that the deposit be distributed according to the terms of the compromise. The broker refused to do so, claiming that the seller owed a commission for the transaction.

The language of the listing agreement between the seller and the broker was just as ambiguous as the purchase offer, and a three-way stalemate developed. The stalemate was complicated by the far-flung geography, and by the fact that if a lawsuit were filed against the Canadian broker, the complaint could only be served on him through international treaty (the “Hague Convention”), which typically requires three to four months of bureaucratic waiting before the foreign defendant can be forced to respond to the complaint.

Lessons Learned This case really points out the value of a well-drafted contract. We are frequently amazed at the lack of attention paid to this issue, by everyone involved in the transaction. Brokers, buyers and sellers all look at the purchase contract as a waste of paper. This is even more surprising when compared to a real property transaction, where the parties will slog through stacks and stacks of paperwork without a question.

The Purchase Agreement form used by the California Association of Realtors is eight pages in length with a fairly small-size font, and with a set of accompanying forms that is beyond description. These agreements are used universally throughout the state of California. In contrast, the forms offered by the California Yacht Brokers Association are shorter and printed in a very large font. Nonetheless, many yacht transactions proceed with the use of a “simple” form such as the agreements described in this case.

Let’s take a look at this transaction and see where a well-drafted agreement would have helped things along.

1. Basis and Method for Rejecting the Boat. A well-drafted purchase agreement will provide for an unambiguous procedure for inspecting and rejecting the vessel. The contract should provide that the sale is, for example, subject to various contingencies (sea trial, survey, etc.) that must be met to the “buyer’s satisfaction.” This gives the buyer the discretion to choose his own surveyor and to base his decisions on the opinion of his surveyor. The inspection terms of the contract should also provide for an unambiguous method for the buyer to communicate his wishes. The simplest method will require the buyer to actually sign off when all contingencies are satisfied, so that there is no contract unless he signs off.

2. Disposition of the Deposit. This confusion arose from an interesting series of events. Many brokerage listing agreements call for the payment of a commission if the broker produces a buyer who is prepared (“ready, willing and able”) to purchase the boat, and the seller decides not to sell the boat. In this case, the listing agreement was silent on this issue, and the buyer certainly was not prepared to buy the boat. The broker nonetheless decided that he was owed the commission, and he further determined — on his own — that the commission would be paid from the buyer’s deposit. As far as he was concerned, the fact that the buyer and seller had reached a compromise was not relevant. What a mess. This could all have been avoided with the use of the unambiguous language suggested above, with the addition of a short paragraph that explains the procedure for refunding or retaining the deposit. In real estate transactions, a complex set of escrow instructions accompanies every deal. This was a half-million dollar yacht transaction, with no instructions whatsoever regarding the disposition of a $50,000 deposit.

3. Attorneys’ Fees, Venue and Jurisdiction. Practical considerations in this case forced the buyer to compromise his claim with the seller and introduced a great level of uncertainty in connection with any claim against the broker. Could these parties be sued in California? Would two separate lawsuits be necessary (one against the seller and one against the broker)? Would the attorneys’ fees be recoverable, and if not, would the cost of the litigation exceed the value of the $50,000 deposit? All of these issues could — and should — be addressed in a properly drafted contract.

The case study presented above is a true story, and it highlights the need for a properly drafted purchase contract. Ambiguity is bad. Unless, of course, you enjoy paying an attorney to go to court for you.